Choosing form of pension- Husband/Wife

[freebird5825]

Quote:

Originally Posted by ziggy29 Having "managed" my mom's taxes and investments since my dad passed, I can tell you that the death of a spouse is a bad enough emotional hit, and the financial hit is salt in the wounds. She lost her SS check when he died, AND she was kicked into the "single" tax filing status. As a result, in 2006 (her first year filing single) her income was almost $10,000 less than it was in 2005, but the change from MFJ to single meant she owed $3,500 more in taxes on $9,500 less income because it kicked her into the 25% bracket AND changed her SS from being 50% taxable to 85% taxable.

Excellent post.
I bolded the ONE thing everyone forgets - the change in filing status from married to single.
BTDT and got clobbered myself. It's a good thing I had a salary (not SS) AND an emergency fund to fall back on.

[ziggy29]

Quote:

Originally Posted by freebird5825 I bolded the ONE thing everyone forgets - the change in filing status from married to single. BTDT and got clobbered myself. It's a good thing I had a salary (not SS) AND an emergency fund to fall back on.

And yet it's such an important thing to remember in planning survivor income. In many cases, the widowed spouse will need a considerably higher pre-tax income just to have the same after-tax income. Some life expenses will be cheaper for one person than for two, but it's often not *that* much, and probably not by as much as Uncle Sam will dig deeper into your pockets because your spouse died.

[Animorph]

(Edit: missed the page 2 posts, but still a little relevent)

Your expenses will be reduced by about $800/month if DH dies first, so you can almost give up the pension in that case without a big impact on your finances. I think SS will also decrease if you are both getting it, so make sure how your SS survivor benefits will work as well. My understanding is that you will end up with the larger of either SS benefit, but not both. If total SS takes a big drop you may need the 100% survivor benefit. If SS remains the same, I might go with the 50% benefit or maybe 5-year, depending on how the rate of return looked. That gives you the max benefit while you are both alive and protects you adequately if DH dies first.

Also, that non-COLA benefit will make up less and less of your income as you age. That $9600/year savings is going to inflate. So the bottom line will get better with time.

[bizlady]

Our SS will be nearly identical- projections are about $7 a month difference, with mine being just slightly higher. SO we will each draw on our own, just not sure if we will take it at 62 or later yet. But you make a good point, as I would lose the pension AND his SS if he goes first.

The insurance ideas posted by others are also interesting and merit consideration. We have a 25 year level term now for just 100k each, (no minor children and no debt) and were going to drop his at retirement and keep the insruance on me, as my husbands expenses would not drop that much if I were to go first. Had not thought about the other way around though...

[youbet]

Quote:

Originally Posted by ziggy29 And yet it's such an important thing to remember in planning survivor income. In many cases, the widowed spouse will need a considerably higher pre-tax income just to have the same after-tax income. Some life expenses will be cheaper for one person than for two, but it's often not *that* much, and probably not by as much as Uncle Sam will dig deeper into your pockets because your spouse died.

Either DW or I could live nicely alone on 60% of our combined post tax retirement income. If a couple finds themselves in a position where it takes close to 100% of their combined post tax income for the survivor to carry on alone, they need some help in their retirement financial planning and budgeting.

[akck]

For our pensions, I'll opt for the 75% survivor benefit (highest available), and my wife will opt for the 50% survivor benefit. My wife's pension won't be as big as mine and I figure I can live cheaper than she can. I'm not sure if my wife can live on less (in theory she should be able to do so), but then again, she really won't have a choice. The difference is that I'm willing to downsize as necessary and I don't think she'll want to so.

[Telly]

To each his own, but I'll offer a different viewpoint.

I had a small fixed pension coming of less than $500/month. When I early ER'd, the earliest start date of the pension was well off in the future. But in the meantime, inflation was reducing its real value year by year. When I reached the minimum age to take it, I took it single, no survivor benefits. Survivor benefits would really cut into it. If I went with a survivor benefit, with its corresponding reduction, then looked at inflation's effect on what was left of it over the coming years, it made one wonder, why bother having a pension at all?

So to maximize the current dollars out of it, DW filled out the forms to swear off of her interest in it. And now every month the single person amount goes into a checking account for the use of both of us. At least we will get some $ out of it before inflation reduces it to pocket change. If I kick off after writing this post, and the payments therefore stop, oh well. But I think it more likely that inflation is the killer in my case.

When the (fixed) pension dollar amounts are lower, I think that inflation's effect should be factored into the decision, along with the pensioner's health, of whether to go single or joint-survivor.

[Walt34]

We talked about that (spousal benefit options) a lot as there were about five or six to pick from. We settled on the one where the COLA'd pension is reduced by 30%, figuring that she'd move to a smaller home or condo, one less vehicle, less food, etc. To ease the transition there is few hundred thousand in savings/investments/life insurance and she has a fairly frugal lifestyle so while she won't be jetting around the world - not something she wants anyway - she won't be dining on Alpo either.

Taking that option "cost" about $5-6$k a year in income but she's worth it.

[Independent]

I recommend the approach that keeps the survivor income balanced. Your income, if he dies first, should be about the same as his income if you die first. That says you take the 100% to the survivor. It still isn't perfectly equal, but it's a lot closer.

However, you said that his expenses are higher than yours. Is that because he has expensive hobbies? or a some additional necessity (e.g. chronic medical)? In the second case, I'd accept some difference, but the "pop" in his benefit may cover it already.

That leaves life insurance. You could use it to equalize incomes. Theoretically it works, in fact, it can be awkward and expensive.

In my case, my prior employer maintains a group term life benefit on retirees. When we included it, it turned out that "equalizing" meant less than 100% of the pension for my wife.

[metabasalt]

Quote:

Originally Posted by youbet I agree with BestWife, that is generous and unusual. So unusual, in fact, that I'd double check that. That feature makes the decision easy, go with the max spousal benefit.

Haven't looked at this forum in almost a year but was reading this thread today and happened to notice your logo/icon/avatar. Being an ex-Kankakeean from wayback it caught my interest. Is the photo taken in Kankakee?

[youbet]

Quote:

Originally Posted by metabasalt Haven't looked at this forum in almost a year but was reading this thread today and happened to notice your logo/icon/avatar. Being an ex-Kankakeean from wayback it caught my interest. Is the photo taken in Kankakee?

I believe that photo was taken near the Kankakee River State Park. We were on a two day outing with the local paddling club.

The Kankakee River is really nice, especially considering its just over the horizon from the Chicago skyline.

[metabasalt]

Quote:

Originally Posted by youbet I believe that photo was taken near the Kankakee River State Park. We were on a two day outing with the local paddling club. The Kankakee River is really nice, especially considering its just over the horizon from the Chicago skyline.

Thanks YouBet. I used to go to picnics there many, many years ago. However I never remember the Kankakee River being just over the horizon from the Chicago skyline. For me there was the 30 minute El ride down to Roosevelt? Station, then another 60-120 minutes on the City of New Orleans as I recall. By the time I got home I'd been staring over the horizon for hours! Still I did love that train ride!

[dgoldenz]

$135/month would get him about $150,000 in life insurance that is guaranteed for life (universal life with no-lapse guarantee, not whole life) if he is in preferred risk health. Whole life for someone at age 55 usually does not make sense, especially since you are looking for death benefit, not cash value accumulation. If he can qualify for preferred rates, I think your best option is to take the $843/month and pay for the life insurance. This process is called "pension maximization". $150k life insurance is about 18 years worth of difference at that $700/month number you'd be getting otherwise. I am not sure how old you are, but is your life expectancy 18 years longer than your husband? That $150k is also paid out in a lump sum, so your present value would be $150k. The pension is paid out monthly, so your present value of $700/month for 18 years would be even less.

[bizlady]

I'm just a year younger than my husband. We have in place a 25 year flat rate life insurance policy on each of us for 100k term life each--cost is $1000 a year (just over $200 for me, and $800 for him in premiums). Just took that out 2 years ago..... not sure how long we will keep that, but at least ontil SS kicks in I think...

[dgoldenz]

Quote:

Originally Posted by bizlady I'm just a year younger than my husband. We have in place a 25 year flat rate life insurance policy on each of us for 100k term life each--cost is $1000 a year (just over $200 for me, and $800 for him in premiums). Just took that out 2 years ago..... not sure how long we will keep that, but at least ontil SS kicks in I think...

Was he issued preferred risk class? If he was, he could get a new $100k policy guaranteed for 30 years for less than you're paying now ($692/year if he's age 53 now). A new 25-year policy would be $547/year at preferred rates. Your current policy would only have 23 years left if you bought it 2 years ago.